US: property prices in dramatic decline

The Wall Street Journal this morning reports that two real estate property auctions completed last week with disturbing news for everyone.

It's bad news for lenders: suddenly they are deep into the territory where the value of securities does not cover the amount of the loan.

It's bad news for investors in asset backed securities i.e. securitised bundles of loans

It's bad news for borrowers: even if their home is repossessed, they will still have a debt

It's bad news for the insurance sector which covers "top up" loans e.g. the amount between, say, 70% of the purchase price and the amount of the loan so that purchasers do not need such a large lump sum.

And it's bad news for the Fed - all of a sudden, those bank balance sheets it offered to support are looking rather weaker than they did on Friday.

So what did the WSJ find?

"An auction of about 135 foreclosed homes in San Diego Saturday provided more sobering news for mortgage lenders. Ramsey Su, an investor and former real-estate broker who attended, calculated that the high bids for the homes averaged 67% of the prices they fetched when they were last sold, mostly in 2004 or 2005. At a similar auction in San Diego in May, the average was 73%."

Note "the high bids."

Given that our own research in Kuala Lumpur in Malaysia shows auction property prices at about 65% of private treaty prices and in Hong Kong we are seeing the almost unthinkable of landlords taking offers on rental properties close to the prime commercial districts, we fully expect to see the US market having a detrimental effect, even if only psychologically, on markets across Asia.

See "When America Sneezes" - Singapore 23-34 September 2007. Details here